Tesco admits defeat as it bids 'sayonara' to Japan

Tesco is ditching its loss-making Japanese arm, one of the first major strategic moves by new chief executive Philip Clarke.

The move is an admission that it has failed to crack the Japanese market after eight years of trying.

Tesco has 129 small stores in Tokyo with sales of £476 million, which are now up for sale. Of these, 12 of the stores are being shut immediately, while the rest will keep trading.

Clarke said: "Having made considerable efforts in Japan, we have concluded that we cannot build a sufficiently scalable business."

The move is likely to prompt more speculation that Tesco is considering an exit from other markets, particularly the US, where its Fresh & Easy business remains a loss-maker.

However, the company insists that "no signal" is being sent by the Japanese move.

James Collins at Deutsche Bank agrees, writing in a note to clients: "The decision to divest is not a big surprise - Tesco has been through a number of iterations trying to make the business work - but we see it as a positive sign of change from the new chief executive. Does it make more other portfolio changes likely? No - Japan has been a real outlier in terms of persistent losses in a very difficult retail market."

Collins adds: "Tesco has very clear milestones for the US business - in particular a target of moving into profit during next year.

"Management is making substantial changes to Fresh & Easy, has promised to deliver significantly lower losses this year versus last and is currently, in the words of management 'on a strong trajectory'."

Sales in Asia are £11 billion from a group total of towards £70 billion.

James Anstead at Barclays Capital said: "The decision to exit Japan demonstrates that Tesco is willing to cut underperforming divisions - and clearly the other market which stands out as a 'problem' is the US.

"However we believe the two situations are very different. While both are mature markets, in the US Tesco has entered with a radical, new format, whereas the Japanese business was a more conventional supermarket format.

"Whilst we still think the jury is out on the future of the US division, all recent commentary from management suggests that Tesco is happy with the momentum in the business and therefore we do not feel an exit is likely in the short term."